With New $875M Fund, JMI Equity Maintains Focused Strategy on Software Deals

12/23/10Follow @bvbigelow

“We don’t spend a lot of time on our story,” JMI Equity’s Paul Barber told me last week in the investment firm’s La Jolla office. It’s another way of saying the firm maintains a low profile, and during my 20 years in San Diego, I can’t remember JMI ever stepping voluntarily into the media spotlight.

But times change, and Barber—who is the firm’s managing general partner in San Diego—has good reasons to step forward now—875 million of them, in fact. That’s how much cash JMI raised from its investors for its seventh fund, at a time when the capital markets remain slushy, if not exactly frozen.

“In this very challenging fundraising environment, we are grateful for the continued support of our longstanding investors, as well as the substantial interest from new investors,” Harry Gruner, who is the firm’s managing general partner in Baltimore, MD, and a JMI co-founder, said in a statement last month.

The firm’s ability to raise $875 million in this era of capital scarcity is due largely to JMI’s record of successful returns on past investments, Barber says. More than 50 limited partners have invested in the current fund, officially known as JMI Equity Fund VII, including college endowments, foundations, pension funds, and family investment funds.

John Moores, the software industry magnate (and JMI namesake) who provided the entire $30 million for the firm’s first equity fund, is still an investor in JMI. But the latest Moores family investment represents less than 5 percent of JMI VII, Barber said.

JMI's Paul Barber

JMI's Paul Barber

There is “plenty of capital out there for investment firms,” Barber says. “But to access that capital, you have to demonstrate a consistency in your team, your focus, and your performance. Increasingly it’s about results, and we have been fortunate to have performed very well over many years with largely the same team.”

Barber attributes JMI’s investment performance to its narrow focus on software, Internet business services (for example, business-to-business and software-as-a-service), and healthcare IT. “We’re a big believer in focused strategies,” he says. JMI also confines its venture investments to what the firm calls “growth equity”—innovative companies with steady revenue from established customers that are poised for growth. Barber says JMI looks for opportunities where the firm can add value, which usually means investing capital. But that can extend to tapping its contacts throughout the software industry to recruit CEOs and other key leaders.

“The growth equity market is very attractive because it affords you the ability to take out start-up risk,” Barber says. “We work to find entrepreneurs with proven businesses, established customers and recurring revenue. We try to eliminate market- and product-risk and instead take on team- and business-building risk.”

The managing general partner hinted that JMI also would prefer to establish its own identity, especially in San Diego, where JMI is often associated with Moores, who made his fortune as the founding CEO and chairman of Houston’s BMC Software. Moores emerged as a local power broker when he moved to build a new downtown ballpark after buying the San Diego Padres baseball team in 1994. Moores also came under fire for selling his majority stake in San Diego’s Peregrine Systems in the years before a corporate accounting scandal engulfed the publicly traded software company.

As The Baltimore Sun observed in 1993, JMI Equity was the result of Moores’ ties with Alex. Brown & Sons, the Baltimore-based investment bank (acquired by Bankers Trust in 1997). Charlie Noell, a managing director at Alex. Brown who helped take BMC public in 1988, and Gruner, who worked with Noell in the firm’s technology group, co-founded JMI in 1992.

Barber also was a managing director at Alex. Brown, and headed the firm’s software investment banking practice before he joined JMI in 1998.

In the 18 years since JMI was founded, Barber says the firm has raised $2.1 billion and invested in more than 100 companies. It has had 55 liquidity events (16 IPOs and 39 acquisitions), with 35 companies remaining in its portfolio. Of the 39 M&A deals involving JMI portfolio companies, four were sold in 2010: CA acquired Nimsoft for $350 million; IBM acquired Unica for about $480 million; Hexagon acquired Intergraph for more than $2.1 billion; and TPG Capital acquired Vertafore for $1.2 billion.

JMI’s biggest deal came in 2008 with Google’s $3.1 billion buyout of DoubleClick, the New York digital marketing company. It came just three years after JMI partnered with Hellman & Friedman, the private equity firm with offices in San Francisco and New York, to take DoubleClick private in a deal that was valued at $1.1 billion in 2005.

“What we’re looking for are markets that are growing, and entrepreneurial companies with innovative technology, what we call bootstrap-type companies,” Barber says. “What we provide is capital—sometimes it’s capital needed to grow the business, or capital that provides an exit for the founders and early investors.”

Barber cites San Diego-based Service-Now.com as a classic JMI investment. The founder and CEO, Fred Luddy, was the former chief technology officer at Peregrine Systems and already had a deep understanding of enterprise software that companies use to keep track of computers and other equipment. After Peregrine’s implosion, Luddy saw the opportunity to develop similar asset tracking technology based instead on software-as-a-service.

“We’ve done software-as-a-service plays all around the country,” Barber says. “There are huge benefits for customers, with lower cost of ownership and no servers to maintain. And for the software company, it allows faster innovation. Service-Now can update its software three times a year, where it used to take an enterprise software developer two years to do an update.”

JMI also has invested in another San Diego company, DriveCam, which has moved from a hardware component business model with a wireless video camera to a Web-based subscription business that helps fleet operators reduce the risky driving habits of their drivers. But Barber emphasizes that JMI makes its investments nationwide. “We call all the companies in a given space, and if the best one is based in Atlanta, that’s where we go,” he says.

At the same time, though, Barber says he’s sympathetic to efforts in San Diego to boost local software innovation. “Clearly San Diego needs a healthy venture capital market to help entrepreneurs in the early stages, and JMI is both a supporter of that [mission] and a beneficiary.”

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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